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Tesla's fourth quarter revenues came in comfortably ahead of market expectations at $7.4bn, up 2% year-on-year. However, net income of $105m in the fourth quarter means the group finished the year with a net loss of $775m.

The group delivered quarterly free cash flow of $1bn, again well ahead of expectations, despite increased investment in the Shanghai Gigafactory and Model Y production.

Our View

Tesla's early push into high performance, high quality electric cars has broken all the rules in the automotive industry, where traditionally scale is what counts. The group's now valued at over $100bn, larger than Volkswagen despite the latter producing 10.8m vehicles in 2018 to Tesla's 365,000 in 2019.

Tesla has undeniably had a big 2019. Fourth quarter vehicle production rose 21% year-on-year, the group's delivered successive quarters of profit and free cash is well into positive territory.

The positive free cash flow is particularly impressive given the capital investment that's been going on. Tesla has built an entirely new factory in Shanghai in just 10 months, and production of the Model Y crossover is underway ahead of schedule. If Tesla can self-fund its expansion from here it removes the need for support from markets which have never been 100% behind the stock.

It's not all good news. Automotive margins have slipped as price cuts and the shift to the lower margin Model 3 both dent profitability. Fortunately that's been more than made up for by the extra volumes, and margins should improve from here as volumes rise. Tesla reckons the combination of increased operating leverage and more cost savings could give it an industry leading operating margin in time.

Tesla has delivered some very impressive results, but we still have some doubts. Its valuation is as formidable as its manufacturing expertise and delivering the profits to justify it depends on a massive increase in sales over the years to come. However, even the 'affordable' Model 3 remains a relatively premium product and while Tesla may have caught incumbents napping, the industry is pouring billions into catching up (VW alone is spending $60bn on electric cars over 5 years).

That might explain why Tesla is moving rapidly to expand the range - with the Model Y already in production, the Tesla-Semi due to start production this year and the Cybertruck waiting in the wings. Despite a fantastic brand, formidable manufacturing capabilities and fabulous product, the group needs to rapidly expand its customer base if it's to deliver the volume and margin growth its valuation implies.

That is no small ask. At the current price investors need to ask themselves whether it might be a step too far, even for Mr Musk.

Full Year Results

Tesla produced 104,891 vehicles in the final quarter of 2019, up 21% year-on-year. However, lower prices and increased sales of the lower margin Model 3 meant automotive revenues rose just 1%, while automotive gross profits actually fell 7% to $1.4bn.

Quarterly operating expenses were broadly flat year-on-year, however capital expenditure increased (from $325m this time last year to $412m) as the group ramped up production at the Shanghai Gigafactory and began production of the Model Y in the US.

Tesla has begun work on the next stage of the Shanghai Gigafactory, which will allow production of the Model Y in China and expects to make the first deliveries from its Berlin-Brandenburg factory by 2021.

Net debt at the year-end of $7.2bn fell 13.7% year-on-year.

Tesla expects to deliver 500,000 vehicles next year, with improvements in the solar and storage business too. The group expects to remain profitable and cash flow positive going forwards (with possible exceptions around product launches).

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